The ripple effect of the National Living Wage
HR editorial, March 24, 2016
The National Living Wage will have a wide impact. Hiring, benefits, and prices of goods and services could change too, as an HR magazine roundtable with Kronos discovered
More than a few times in HR magazine you’ll have read a quote from a well-intentioned CEO explaining how “people are our greatest asset”. The inconvenient truth is that, while this statement is true, people are also employers’ biggest cost. And that cost is set to increase.
In his 2015 Autumn Statement the chancellor George Osborne announced a “national living wage” (NLW) will come into effect in April this year, giving a compulsory pay increase to six million UK employees over the age of 25. It will be set at £7.20 per hour (11% more than the current minimum wage) and could reach £9 per hour by 2020. The Office for Budget Responsibility was quick to report that 60,000 jobs could be lost this year alone as a direct result.
In a time of fierce competition for customers – as well as talent in a heated labour market – how can HR directors manage this increased pressure?
HR magazine and workforce management software provider Kronos joined forces to find out and invited a panel of HR directors, CEOs, and operational managers in organisations ranging from casual dining and hotels to insurers, cleaning providers to the NHS, to explore how employers of varying sizes, functions and budgets are preparing to face the challenge.
Business reactions to the National Living Wage
John Stevenson, CEO of cleaning and housekeeping contractor ACT Clean, kicked off the debate. “This pay increase will turn out to cost employers more than it looks,” he said. “We will have to pay an extra 50p per person affected every day. For us, with 1,000 people in this [pay] bracket, it works out at £300,000 per year. We have to find that money from somewhere.”
He also raised the issue of pay parity, a knock-on impact of raising wages at the bottom: “There has to be pay parity throughout organisations so supervisors will need to be paid more as well. It will affect all employers sooner than you think.”
Ed Pyke, cluster general manager for South West London at Premier Inn, added: “We are under pressure to look at our cost lines to ensure profits keep growing. We’ve embraced the NLW and in April we’ll put our wages considerably above this.”
But Steve Rockey, head of people at restaurant chain Big Easy, voiced concerns about the increased wage costs being shunted onto customers as organisations look for ways to balance the books. “On face value employees will get more in their pockets so will be happier. Then you should have happier customers, so it’s not all doom and gloom,” he said. “But to absorb this in such a short space of time will be really tough. Will a customer be happy for their coffee price to increase? I hope so.”
According to Stephen Moir, chief people officer at NHS England, while not all employers will immediately be affected by the wage hike, everyone is under more pressure to cut costs, find efficiencies and generate productivity. “We’re living in a time that’s more complex and more challenging,” he explained. “[At NHS England] there is an efficiency and productivity gap and we have to save £22 billion across the entire service.”
He added: “This [living wage increase] is a potential new challenge for us all. Will this be the new normal? Will it drive further inflation in pay and will we need a pay recalibration as a result? What will happen to the market after the immediate hit?”
But Rockey was philosophical. “It’s an opportunity,” he said. “If you’re in a marketplace where it’s tougher to get talented people then the opportunity is to differentiate yourself as a great employer.”
However, Stevenson raised the point that unscrupulous employers might also focus on recruiting those under the age of 25, as the new pay rules do not apply to people in that age bracket.
“I’m concerned about firms recruiting people under 25,” he said. “We would never pay differently depending on age, but people are starting to ask if we would. Some employers are thinking of bringing their cleaning in-house because they think they can [recruit] younger people and pay them less.”
Productivity and efficiency
While the panel were divided about how heavily the NLW would affect them – at least in the short term – they did agree that given the growing pressures on employers, productivity and efficiency would be a significant focus for 2016.
Ian Smith, payroll, compensation and benefits manager at luxury hotel and rail company Belmond, said: “My initial reaction [to the NLW] was that it would not have a large impact. The trend I’ve seen is the use of technology to push administration tasks back to managers and staff and using self-service to save cost. This frees up HR departments to be more strategic and devise productivity plans.”
Brenda Morris, UK general manager at Kronos, noted a difference between small and large businesses here: “We’ve seen that larger businesses are pushing towards more use of self-service and data; smaller customers instead talk to us about their concerns in managing labour costs. There’s different use of workforce management technology depending on the size of the business.”
Andrew Parker, people and culture leader at the UK’s biggest life assurance broker Lifesearch, faces a more complex challenge.
“We’re growing,” he explained. “We’ve ridden the recession – but I have a target to hire 80 people with the smallest recruitment budget I’ve ever had. We are looking at every job role in our business and investigating how we can get value for money from certain roles.”
Rakhee Patel, people and talent lead at luxury hotel management company Dorchester Collection, added: “We’re looking at operations efficiencies so we can keep growing. We’re paying as we should but the question is: what do we do next?”
Creative engagement and training
The panel agreed that savvy HR teams have already put structures in place to engage, enable and empower employees to perform to the best of their abilities.
“We’ve been prepping for a year,” said Pyke. “We restructured our hotel operations. Previously we had food and beverage or hotel reception teams. And we flipped this and cross-trained everyone to make all those people our ‘ground floor team’. This is important to help us prepare and feel the benefits of productivity.”
Commenting on the importance of engaging staff in a heated labour market, Stevenson added: “There is no doubt there is a lower turnover where people invest in staff welfare. This gives employers the opportunity to be more creative and enhance engagement through technology.”
Smith and Parker were in agreement that the value of benefits cannot be emphasised enough to employees, by demonstrating how much this adds to their reward package on top of wages.
“Firms could be more creative and leverage the strengths of their business in providing benefits,” said Smith. “We own valuable properties, meaning we can offer holiday options for our people at no cost.”
Parker added that total reward statements at Lifesearch demonstrate that the extra benefits the company offers – from life assurance to free coffee – can add almost 50% onto the basic salary of most employees. “Pay has almost become an afterthought,” he said.
Workforce data – the key to strategy?
Proponents of data-driven HR cite benefits including reduced absence-related costs, streamlined compliance tasks, accelerated retroactive calculations and employee self-service tools. Automating workforce management can deliver sizeable financial benefits across an entire organisation – if managed appropriately.
Our panellists agreed that they had no shortage of workforce data to analyse and manage. But how do they capture it?
Morris said: “There are so many sources of data. It’s not just the way you capture it that’s important; it’s the way you use it. What kind of data do you need?
“Our customers often want to start quickly and cut corners, but we have to make sure they capture everything correctly so there is confidence in the data,” she added.
Moir explained: “In the NHS we’ve literally got buildings full of data. We test the temperature of the workforce annually through the staff survey and we have a friends and family test for patients and staff asking if they would advocate the service.”
But in spite of workforce data seeming complex, the panel were unanimous that the only way to use it effectively was to take a step back from number-crunching and look at it simply.
“I think analysis paralysis and too much data can make it difficult, said Pyke. “I’m keen to measure just three things: team turnover; 90-day retention and onboarding; and team engagement scores produced annually and pulsed throughout the year. I look at these every month and ask for solutions.”
Morris outlined the ability of data to allow leaders to “manage in the moment”. If people don’t turn up for work managers have to know that quickly – and act. “This dynamic data is what you need,” she said.
Turning insight into action
But carefully analysing data and simplifying it is one thing. Turning it into actionable outputs to increase productivity, reduce cost, and impact the business bottom line is another.
“We’ve always tried to use data to complement decision-making” said Parker. “We’re close to our managers and know the challenges they face. As such we can work from our gut feel. We react to this then ask for data to prove or disprove it. I’m an advocate of human relationships supported by data.”
Smith added: “Data in isolation is complicated – so decide the issue you want to address, then work with partnersto find and analyse data in the context of the market.”
The idea of collaboration resonated. “We’ve been surprised how willing customers are to come together and share [data]. There has been a shift,” said Morris.
“We want to be number one in our sector and are always thinking about ways to evolve in line with our company’s vision,” said Patel. “We work with other departments using our 3I framework. First we look at insight (data), then we ignite (generate ideas) and then implement them. We get together and tackle challenges as a collective.”
Is HR becoming too data-driven?
The panel noted the merits of great data analysis, but agreed that if HR teams see workforce data as the silver bullet to address organisational efficiency and productivity issues then they’re missing the point of people strategy.
“If you’re spending more time looking at a spreadsheet than speaking to people something has gone fundamentally wrong,” said Rockey. While Smith added: “You can use data to cut costs to the point that your business becomes unsustainable. You can look at a spreadsheet and simply not understand what’s happening.”
And several panellists questioned if data is even indeed ‘fact’. “Who’s creating the data?” asked Stevenson. “We were working with an organisation that thought staff could clean 20 rooms a day rather than 15, as this would save cost – not realising it would put strain on people and increase labour turnover. There can be a danger with data if people don’t understand the consequences.”
Rockey agreed. “Data is not fact,” he said. “If you put rubbish in you get rubbish out. It can’t be the driver. It’s got to complement what you’re thinking already. If you’re so far from the business your data is all wrong you’re presenting nonsense.”
“You can have great reports, but the minute someone tries to unpick it and there are errors then it’s all swept away,” agreed Moir. “Don’t lose sight of the fact you might want to go back and check your own data and not lose that credibility.”
Morris added: “It’s one thing collecting the data, it’s another dealing with it…”
Creating a narrative
“In order to really understand your workforce it’s vital to bring together qualitative and quantitative information,” said Moir. “My persistent question to my team is ‘this [data] is lovely, so what?’
“I’ve never seen the narrative and the metrics line up completely – that would be data utopia for me. I want root cause underpinning analysis.”
Patel agreed, adding: “Data can act as a backup when you’re trying to get your point across. But we don’t want data to overtake common sense. Common sense comes from good values, but you’ve got to have both and listen to both.”
As we enter 2016 things are becoming interesting. Employment rates have never been higher and from April wages will reach an all-time high too. But as employers wait for National Living Wage implementation with trepidation they have both a challenge and opportunity before them – to engage differently with data.
There is a growing gap between those who ‘get’ data and those who don’t; those that deliver what businesses need by taking a straightforward, common sense approach, while treating their people well, and those that find themselves in ‘analysis paralysis’. It’s time to seek out the data utopia...